MR JAMES SMITH, MR DAVID HONE AND MR GARTH EDWARD

8 DECEMBER 2004

  Q280 Gregory Barker: You are in favour of ETS on aviation.

  Mr Hone: We do not operate in the aviation sector.

  Q281 Gregory Barker: You supply fuel.

  Mr Hone: We do, and certainly we have always taken the view—

  Q282 Gregory Barker: You do operate in the aviation sector.

  Mr Hone: As an aviation company, I meant.

  Q283 Gregory Barker: But you do not operate cars.

  Mr Hone: No. Can I finish? We favour the broadest possible application of emissions trading because it introduces the widest number of reduction opportunities.

  Q284 Gregory Barker: Would you agree therefore that the inclusion of transport within ETS would only lead to rationing as suppliers have no—would you not agree that ETS would inevitably act as a demand management tool if technology solutions are not available, for example the transport sector but particularly aviation?

  Mr Hone: In the transport sector related to roads, that is one of the areas that our thinking on road transport has highlighted. That could result in a demand management model. What we have done in our paper is to highlight some of the areas that we see as problematic in road transport. We have not seen through this yet to find a complete solution to the issue so I cannot offer you one today, but we have seen where some of the difficulties are in simply applying the current emissions trading model immediately to road transport, and expecting it to work.

  Q285 Gregory Barker: Where are the difficulties:

  Mr Edward: Perhaps it is useful to look at the mechanics. You have emissions trading applying to large industrial stationary emitting sources and the reason for that is because they are quite relatively cheap to monitor, verify and enforce. If someone cheats, it is quite easy to know who it is. If you devolve back to individual drivers, obviously you have to monitor, verify and enforce against the sources, and the transaction costs of doing so tend to be prohibitive, and would kill the game, so to speak. Aviation of course sits somewhere in the middle, whereas it is not stationary sources but there are finite amounts of them. You can monitor and verify them and so on. There are more costs associated with that than doing it at large power stations and so on, but still it is probably tractable within the overall economy.

  Q286 Gregory Barker: What other policy instruments would you advocate in achieving reductions in the transport and domestic sectors?

  Mr Hone: As I said earlier, there are three areas. There is obviously a change in the type of fuel that is used. At the moment the only possibility is to introduce bio-fuels into the mix. The second one is to improve vehicle efficiency and so you need a policy measure that is really targeting an improvement in vehicles on offer in the marketplace and getting acceptance of them from consumers; and the third one is to address consumers themselves and get them to change driving habits, use of public transport and so on. Obviously, that is clearly a debate that is already active in society today.

  Q287 Gregory Barker: There is not much that Shell can do about the second two, but can you quickly tell us what you are doing on the bio-fuels and particularly whether you see this as an issue for government to play about with the tax relief.

  Mr Hone: I will quickly cover the area of what we are doing on bio-fuels. We are probably the world's largest blender of bio-fuels already today, not in the UK but Brazil and the United States. We are also investing in advanced bio-fuel technologies. We have a stake in Iogen in Canada, a company that is looking into advanced techniques for making bio-fuels such as cellulose ethanol from lignin, a material such as straw and things like that. So we have an active bio-fuels programme and we are active in development of new bio-fuels, and this will bring about better improvements.

  Q288 Gregory Barker: So far as the UK is concerned, do you see development of the bio-fuel market being on hold until the Government sorts out the tax position, or are there things you could do to push it ahead as a bio-fuel producer. There does seem to be a lack of progress in making substantial strides in getting bio-fuels replacing other fuels.

  Mr Hone: At the moment, bio-fuels do need incentive to move into the marketplace. I guess the answer to that question is that we would need to.

  Q289 Gregory Barker: Is there anything that Shell can do apart from simply looking for tax relief?

  Mr Hone: We are doing what we can do, which is that we are looking at development of bio-fuel technology to improve the manufacturing cost. That is what we are doing.

  Q290 Gregory Barker: Do you think that is likely to happen in the near term?

  Mr Hone: No. I would say it is in a ten-year timescale, looking at the introduction of new bio-fuel technology, manufacturing facilities in the UK or elsewhere.

  Q291 Gregory Barker: So unless the Government starts to shift the current tax regime to bio-fuels, it will be 10 years before we see any significant movement.

  Mr Smith: That is probably right. You probably know that the subsidies in Germany are higher than they are here, so to the extent bio-fuels are in relatively scare supply, then they would move in that direction.

  Q292 Gregory Barker: Is not the truth of the matter that we cannot progress a sustainable energy strategy on the basis of cheap energy?

  Mr Smith: I am not quite sure what you mean by "cheap energy". If you are postulating getting back to the 450 or 550 ppm then somehow the cost of energy will be much higher if we are able to maintain emissions at that level, I do not know that that is the case. It is very difficult to make those predictions. Making any assumptions about the future benefits of technology or energy efficiency are difficult to make. There is a set of solutions available which involve renewables and other things such as nuclear, and they will figure in the mix. We hope that the market, the emissions trading systems, the advances in technology, will be sufficient to generate the energy we need in an affordable way; but the market will have to find that out.

  Q293 Chairman: Can I turn Mr Barker's question round and ask you whether you think the recent increase in the price of oil is likely to act as a spur to investment in renewable forms of energy?

  Mr Smith: Other things being equal it will, of course, because now the alternatives look a bit more attractive. The difficulty is then coming to some long-term view about what the cost of oil and gas is going to be. We do not necessarily think it is going to be at today's levels. Everything is hard to predict and particularly the price of oil and gas is hard to predict; but when industry does its calculations, it is on the basis of numbers that are lower than today's prices. Directionally, it does help to drive towards more renewable sources.

  Mr Hone: There is good solid evidence of this too. In the 1970s, as a result of the oil shock and the beginning of the 1980s, you did see a transition in car types and energy efficiency in the United States. When we went to the US and somebody said it was a compact car, it actually looked like one, which is not the case today. The pressure was taken off again as the price moved and went back down again. The market ultimately will dictate where we move to and how the new technologies will move in. If you look already at the cost of wind energy, irrespective of any sorts of incentives and taxes, the cost of wind energy has declined. We have moved from very small wind towers to ones that now generate 5 MW each. The cost per kilowatt hour is declining. The same can be said in the solar business. We hope that the same will be true in the bio-fuels business.

  Q294 Chairman: The relative cost has come down considerably more because of recent increase in traditional oil.

  Mr Smith: In today's comparisons, yes.

  Q295 Sue Doughty: I would like to look at where we are internationally. In your memorandum you were quite downbeat about making progress internationally on carbon reduction. You said that other countries would need to develop carbon strategies in the same way as the United Kingdom has done. You said: "Without some clarity around energy development and the goals of individual countries understood by all, it is difficult to see how further discussions on managing carbon can commence." How long do you think it will take to get to the starting point?

  Mr Hone: For us, the starting point is very much a focus on energy. Energy is the key that unlocks this whole thing. What we see is a lack of focus on future energy demand and energy management within economies. The UK has set a good example with its Energy White Paper, and what we are advocating is that that process replicates itself throughout the world, particularly in countries that really do not tackle this issue at all and which move from one crisis to another. I do not think it necessarily has to be a long process. Certainly within the time frame of negotiating the second phase of Kyoto, energy management and energy ideas can be tabled as part of that process. I think it is the right starting point to get everybody in the frame of mind.

  Chairman: We will have to end our session there. Thank you very much for your evidence and for your written submissions. There may be some questions that we would like to follow up in writing. We will be in touch with you.